Diversification operates on a basic principle – do not put all your eggs in one basket.
Investing in different industries or even different financial instruments help you create a balanced portfolio, where the risk of losses in one segment is mitigated or netted off by the profits of another segment. You could diversify industry-wise or even by investing in different financial instruments that offer different features.
Diversification aims not to eliminate risk but lower it or cap it at a certain point.
Here’s how diversifying your portfolio will help you maximise your returns:
More flexibility:
With a diversified portfolio, you will have enough flexibility to bear some losses before you start to panic and exit the investment. The profit from your counter investments can help you take the hit from some investments until they stabilise again.
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Shield against market volatility:
You are heavily exposed to industry-specific risks if all your stocks are in a particular industry. By diversifying your portfolio through investments in other markets, you reduce your vulnerability and exposure to one industry.
Reduce Maintenance Time:
Maintaining a diversified portfolio is like a one-time set-up followed by minor rebalancing when required. However, not having a diversified portfolio will require you to closely follow your investments, as even the slightest change in the market might directly impact your entire investment.
You set a limit on your losses:
Say you invest in the share market through individual stocks and ETFs, investing in FDs. You know that the returns from FDs are fixed and secure. Now, if you happen to make losses from your stocks, your ETFs average out your returns and give you a decent return. Therefore, from an overall perspective, no matter how much loss you
make, you can always recover your losses through your other investments.
You can always change your risk appetite:
By reshuffling your investments within the portfolio, you could change your risk appetite at any time. If you want to lower your risk, sell your investments with a higher risk and invest that money to increase your investments that offer low risk.
Diversification comes in different forms:
You can also strike a balance between liquid and illiquid or short-term and long-term investments to ensure that your portfolio complements your financial goals completely. Some financial instruments like ETF, Mutual Funds, etc., offer diversification within your investments in the share market specifically.
Online stockbroking platform will create a diversified instrument for you to invest in and enjoy the benefits of industry-wise diversification directly.
However, it would be prudent to ensure that you invest in different financial instruments to create a well-diversified portfolio of investments.
